Optimal Trust Design in Mass Tort Bankruptcies

Abstract

Many firms have filed for bankruptcy to manage mass tort liabilities, most notably asbestos producers. We model a bankruptchy procedure that optimally balances the liquidity needs of present claimants and an uncertain number of future claimants. We find that future claimants should receive greater awards in expectation than present claimants as compensation for bearing greater future claims risk. We also find that allocating more value to contractual creditors in bankruptcy makes an earlier filing more likely, which may increase overall welfare. Optimal risk-sharing implies that creditors should receive equity in a trust fund, with tort claimants receiving senior debtlike securities.